Archive for March, 2008
How to avoid being upside down
Posted by: | CommentsHow to avoid being upside down
By Marcie Geffner – LendingTree.com
It’s no secret that home prices have declined in many U.S. cities and towns. Indeed, median prices dropped in nearly half of the country’s major metropolitan areas in the fourth quarter of 2007 compared with the fourth quarter of 2006, according to the National Association of REALTORS®.
If the value of your home has declined, you may owe more on your mortgage than your home is worth. In real estate-speak, this position is often referred to as being “upside down.”
Being upside down may sound frightening, but could be of little immediate consequence if you can afford your mortgage payments and don’t want to sell your home or refinance an existing home loan. You’ve suffered a loss on your investment, but that loss is only on paper.
On the other hand, being upside down can represent a real concern if you want to refinance or sell your home. You likely won’t be able to refinance without equity, and you may need to come up with cash to pay off your mortgage if you sell.
The risk of being upside-down may give you pause if you want to buy a home as well. Fortunately, there are a few strategies that can reduce your risk. Here are four to consider:
1. Don’t overpay. Before you make an offer to buy a home, educate yourself about home prices and rents in your local area. Consult a REALTOR® and do some research on the web at a minimum. If you had to move and your home could be rented out for enough money to pay your costs of ownership, that could be a workable back-up plan.
2. Make a down payment. An initial equity cushion of, say, 10, 15 or 20 percent of the value of the home you want to buy could protect you from becoming upside down even if the value of your home declined.
3. Understand your mortgage. If you get an adjustable-rate loan, make sure you feel comfortable with the highest possible interest rate and payment. Also be aware that if you choose a payment option-ARM and make only minimum payments, the amount you owe could increase over time. That would raise your risk of being upside down.
4. Plan to stay put. Historically, home prices have risen and fallen in cycles over long periods of time. If you are upside down now, but plan to stay in your home for a long time, you might be able to ride out a downturn until you are right side up again.
© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.
How Fed rate cuts affect your credit card
Posted by: | CommentsHow Fed rate cuts affect your credit card
Fed rate cuts mean that it may be a good idea to shop around for the best credit card interest rate.
Q. When the prime rate and other key rates are falling, does that mean credit card interest rates will decline as well?
A. Generally, yes. Fed rate cuts often translate into better deals for many credit-card holders, said Justin McHenry, research director for Indexcreditcards.com, which compares credit-card features.
On the other hand, a number of credit-card companies have recently raised rates despite the recent rate cuts by the Federal Reserve. This may be in response to the subprime mortgage crisis and unrest in the credit markets. So some credit card holders may have actually seen increases in their rates
Depending on your credit-card agreements, payment history, and credit history, cardholders may find that their interest rates fall automatically after a Fed rate cut. If, for example, your rate is prime plus 4.99 percent, your Annual Percentage Rate, or APR, may fall along with the prime rate.
And you might be able to get an even better deal.
“For a lot of people, this is a good time to either see if they can get a lower rate, or to look around” for other cards charging a lower rate, McHenry said.
Some credit cards have a floor below which rates can’t fall, he said. But it’s cheaper for a credit-card company to keep old customers than to recruit new ones, so many companies are willing to bargain within those limits to keep good customers.
“Your best negotiating point is how good your credit history is and whether you actually could go get another card,” according to McHenry. “You need leverage on your side. The more you know about your credit history, the more leverage you have in asking for something.”
One caution: Your credit could take a slight hit if you close an older account in favor of a new one, especially if you will be close to the credit limit on the new account with a balance transfer.
10.3.2008 – An exclusive interview given by Mr Jiří Šmejc, a shareholder in the PPF Group and PPF Investments, to the leading Czech daily Hospodářské noviny (HN).
ARMs less popular, Freddie Mac reports
Posted by: | CommentsARMs less popular, Freddie Mac reports
Low 30-year fixed interest rates make adjustable-rate mortgages less attractive.
Adjustable-rate mortgages (ARMs) are waning in popularity but remain the mortgage of choice for certain homebuyers, according to a Freddie Mac survey released in January 2008.
Applications for ARMs represented just 17 percent of prime mortgage applications in October 2007, the lowest since June 2003, Freddie Mac said in a news release outlining the findings of its annual ARM survey. (Freddie Mac is a government-sponsored mortgage-finance corporation that buys mortgages and resells them to investors on the secondary market.)
While applications are down, delinquencies on prime ARMs are up. At the end of September 2007, the rate of serious delinquencies was 3.1 percent, compared with 1.1 percent a year earlier. The delinquency rate for prime fixed-rate loans was less than 1 percent.
Highs and lows
Since 1995, the ARM share of mortgage applications has ranged from a high of 33 percent in 2004 to a low of 11 percent in 1998, Freddie Mac said. ARMs are more popular when interest rates rise because the introductory interest rate can be significantly less than the rate on a 30-year fixed-rate loan.
But when interest rates are low, as they are now, the difference between the introductory ARM rate and the fixed rate can be as little as .25 percent. That leaves little incentive for borrowers to take on the higher risk many associate with an adjustable-rate mortgage, said Pamela Hamrick, vice president of operations for LendingTree Loans.
Popular ARMs
The most popular type of adjustable-rate mortgage is a 5/1 ARM, in which the rate adjusts upward after five years, according to Freddie Mac’s surveys. More than 90 percent of lenders surveyed offered 5/1 ARMs. The new interest rate can be as much as 5 percentage points higher than the introductory rate, said Frank Nothaft, Freddie Mac vice president and chief economist.
Many lenders also offer 3/1 and 7/1 ARMs, in which the rate adjusts after three years or seven years.
What’s right for you?
Hamrick said homeowners who don’t plan to stay in their home long can benefit from the lower monthly payments of an adjustable-rate mortgage. An ARM also can make sense for someone expecting a significant bump in their income before the rate adjusts, she said.
Refinancing to a fixed-rate mortgage may be an option for some homeowners. Keep in mind that for now, most lenders have significantly tightened lending standards, and that home values in many areas of the country have dropped. If either factor is in play when you try to refinance, it could affect your ability to refinance and to get the lowest possible interest rate.
© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.
Interest rate ups and downs
Posted by: | CommentsInterest rate ups and downs
By Marcie Geffner, LendingTree.com
If you’re shopping for a mortgage to buy a home or refinance your existing loan, you’ve probably noticed that interest rates change almost every day. And you’ve probably discovered that these ups and downs can affect how much you can borrow and how much your monthly payments will be.
Some borrowers become confused or frustrated by interest rate fluctuations. But these changes are a normal part of the financial markets. That’s why it’s a good idea to keep a watchful eye on interest rates if you want to borrow money or have an adjustable-rate loan.
Many economic and political factors affect interest rates, and sometimes even the experts aren’t certain why interest rates perform as they do. Moreover, long-term and short-term interest rates aren’t necessarily in sync. For example, sometimes mortgage rates can rise even when the Federal Reserve cuts short-term bank interest rates.
Fortunately, there are ways that you can minimize the impact of interest rate changes on your financial future if you’re looking for a loan:
Stay alert. Keep in close contact with your loan representative from the day you submit your application until your loan is funded. Don’t let your attention lapse just because you’ve been prequalified or turned in all of your documentation.
Lock your rate. A “rate lock” can hold an interest rate on your loan for a specific period of time. Be sure to find out whether your rate has been locked and if so, when the lock will expire. A verbal rate lock may be vague or good only for a short time, so you should always get a rate lock in writing.
Be conservative. If you’re shopping for a home, don’t overextend yourself financially. Figure out how much you can afford and then stick to that limit. If you make an offer that’s within your means, you’ll probably still be able to buy that home even if interest rates creep up before the deal closes. A conservative approach is also appropriate for a home-equity loan.
New FICO score formula
Posted by: | CommentsNew FICO score formula
By Brenda Spiering LendingTree.com
If you’ve ever applied for a loan and had your application rejected, you may have been surprised to discover that your credit rating wasn’t as good as you thought it was. Lenders rely upon credit bureaus to supply valuable information to help determine the credit worthiness of loan applicants. But one of the never-ending challenges these bureaus face is to make sure the information they provide is as reliable as possible. That’s why Fair Isaac Corporation, the supplier of the most widely used FICO credit score, has released a new and improved scoring model.
FICO 2008
Called FICO 08, the new score will retain the same scoring range as current FICO scores, from 300 to 850, but is expected to provide a more fair representation of a person’s credit history.
It will do this, in part, by deducting fewer points than the current formula for occasional credit transgressions and deducting more from those who are repeatedly late on their bills. And, most importantly, it will put a stop to the practice of someone with poor credit boosting his or her score by hitching onto someone else’s good credit rating. This practice, also known as “piggybacking” onto another person’s score, causes a problem for lenders because it misrepresents someone’s true creditworthiness.
Concerns about the new formula
Some critics have concerns that preventing all authorized users listed on credit cards from benefiting from obtaining a shared credit history, is going to hurt those who need it most. For example, parents will no longer be able to boost their kids’ scores under the new formula. Whereas the existing FICO score enables parents to add a son or daughter onto their credit card as an authorized user to help them obtain a good rate on a loan, this will no longer be possible with FICO 08. However, proponents of the new system say the benefits of blocking fraudulent users from this practice far outweigh such downsides.
Building good credit under the new formula
To establish good credit in the future if FICO 08 becomes the new scoring standard, all consumers will simply have to follow the tried-and-true practice of building their own credit rating from the ground up. This means applying for such easy-to-obtain credit cards as store cards and gas cards and gradually building up a positive credit history by making regular payments in full and on time.
New score to be available this spring
The new score will be available to lenders this spring through TransUnion, the first of the three credit bureaus to offer the new system. However, according to a company spokesman, banks and other lenders typically spend a year to 18 months conducting their own internal testing before they adopt any new credit scoring system. It’s therefore expected to be a while before FICO 08 will have an impact on consumers. In the meantime, as always, it’s important to stay on top of your credit rating so you can catch and correct any inaccuracies.
Start today, by requesting your free online credit report and score from LendingTree.
Choosing the right home loan
Posted by: | CommentsChoosing the right home loan
This basic guide to the pros and cons of different kinds of home loans can help you pick the mortgage that’s right for you.
You have a lot of mortgage options to sift through when you’re buying a home, and making a decision can feel overwhelming. Here is some information to help you understand different kinds of home loans and find the best mortgage for you.
Fixed-rate mortgages
As the name suggests, the interest rate on a fixed-rate mortgage stays the same throughout the term of the loan. Fixed-rate mortgages appeal to people who:
- Will likely stay in their home for more than three or four years.
- Want to know that their payments will stay the same over the life of the loan.
Most fixed-rate mortgages are for terms of 30 or 15 years; the interest rate on the shorter-term loan is less, reducing the overall cost of the loan for people who can afford the higher monthly payments.
Adjustable-rate mortgages
Monthly payments on an adjustable-rate mortgage can adjust up or down depending on market conditions, usually every one, three or five years. ARMs may appeal to:
- People who know they will be in their homes for less than three years.
- Buyers who want significant savings on interest early in the loan. They may plan to refinance or sell before the rate adjusts and are willing to take the risk that they will be able to do so.
- Buyers who believe interest rates will go down.
Hybrid mortgages
Hybrid mortgages are a blend of the features of fixed and adjustable rate mortgages. A Hybrid ARM has an interest rate that does not change for several years (the fixed term), after which it adjusts every year for the life of the loan. The most common hybrid mortgages are 3/1 and 5/1 mortgages which have a fixed rate of three years and five years, respectively, and then adjust annually after the fixed term expires.
Hybrid mortgages may work if:
- You plan to sell or refinance before the fixed term ends.
- You want to save on interest during the early years of the loan and will be able to afford potentially higher payments when the rate adjusts.
Option ARMs
These adjustable-rate mortgages allow you to select from up to four payment options each month. The minimum payment is low at first, but can rise quite a bit after an introductory period. You’ll build equity more quickly if you choose higher payments. If you choose the minimum payment too often, you won’t be building equity in your home and could even increase your loan’s balance.
Option ARMs may work for you if:
- You want flexibility because your income fluctuates. (For example, if you work on commission and may be able to make very large payments one month, but much smaller payments the next.)
- You are financially disciplined and won’t be tempted to pay only the minimum each month. Paying just the minimum can lead to a dangerous scenario where you owe more than the loan’s original amount.
Interest-only and balloon mortgages
Interest-only and balloon mortgages allow you to make lower payments for a number of years. But you won’t build equity on an interest-only loan, and eventually your payments will increase after the interest-only period expires (usually five to ten years). A balloon mortgage offers low regular payments for a number of years, but then requires you to pay off the principal all at once.
Interest-only or balloon mortgages may work if:
- You expect a financial windfall down the road that will allow you to pay off or pay down your mortgage.
- You have a temporary financial crunch.
- You plan to sell quickly.
Keep in mind that many mortgage lenders have cut back dramatically on more exotic loans, and some won’t offer them at all. Carefully consider your long-term financial situation and tolerance for risk as you mull your choices.